Experimentation in Organizations
No 6631, Working Paper from Department of Economics, University of Pittsburgh
We consider a moral hazard problem in which a principal provides incentives to a team ofagents to work on a risky project. The project consists of two milestones of unknown feasibility.While working unsuccessfully, the agentsâ€™ private beliefs regarding the feasibility of theproject decline. This learning requires the principal to provide rents to prevent the agents fromprocrastinating and free-riding on othersâ€™ discoveries. To reduce these rents the principal stopsthe project inefficiently early and gives identical agents asymmetric experimentation assignments.The principal prefers to reward agents with better contract terms or task assignmentsrather than monetary bonuses.
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